We've all seen the ads on late night television, promising that a reverse mortgage will solve all our financial problems. With the money you get from a reverse mortgage, according to the advertising, you can pay off your existing mortgage, pay for some home improvements, even take that dream vacation. And, yes, depending on your circumstances and how much equity you have in your house, you may be able to do all these things, and more.
But… as we all know, nothing in life is free. It’s important to look at reverse mortgages – which are also called HECM loans, or a home equity consolidation mortgages – as a financial tool that allows you to take money from the equity in your home and spend it however you please. For some people, this may be a really good idea. However, it's important to remember that it is a loan that eventually has to be paid back.
In other words, taking out a reverse mortgage means you will not be able to leave a debt-free home to your heirs.
How do reverse mortgages work?
Like any loan that lets you borrow money by securing it with the equity in your home, a reverse mortgage is a perfectly legal and legitimate way to obtain funds. To be eligible, you must be a homeowner who is 62 years of age or older and have a substantial amount of equity in a home that is your primary residence.
When you take out an HECM loan, you can choose whether you want the money in a lump sum, in the form of fixed monthly payments, or as a line of credit. And unlike a traditional mortgage, you don't have to make monthly loan. Instead, the balance is due when the borrower dies, sells the home, or moves to a different home, in which case it would no longer be the primary residence.
An important decision no one should take lightly.
As with most advertising, the reverse mortgage ads you see on TV emphasize the things you are most likely to perceive as positive, and may only disclose any consequences that they are legally required to. If you or someone in your family is considering a reverse mortgage, it's important that the borrower or borrowers understand the details. For example:
The balance is due when the borrower passes away. According to the terms of any reverse mortgage agreement, as soon as the borrower passes away or moves away, the balance on the loan is due. While there are options for the heirs to consider, decisions usually have to be made pretty quickly.
The borrower’s heirs are never responsible for the balance of the loan. A reverse mortgage is known as a “non-recourse loan,” which means if the balance is more than the appraised value of the home, neither the borrower’s heirs nor the estate have to pay the difference. It is, however, the responsibility of the heirs to contact the lender as soon as possible after the borrower dies to determine next steps.
As the borrower’s heir, you have several options in front of you. However, it is important to act quickly in making decisions about the home. With some lenders, heirs will be given up to a year to pay off the balance. Other lenders may offer up to six months to determine financing, but the terms and conditions offered may vary. Options may include:
Keeping the home in the family. While heirs usually aren’t allowed to refinance an HECM loan, it is still possible to keep the home in the family. This typically means the borrowers heir’s have to pay the full loan amount, as well as any associated fees and accrued interest. You might need to find a special lender because most conventional lenders won't approve a mortgage for someone whose name is not on the title of the home.
Selling the home. If the appraised value of the home is more than the amount due on the loan, the home can be sold to pay off the balance, leaving the remainder of the money as an inheritance.
Allowing foreclosure. This is an option that makes sense when the home is worth less than the balance on the reverse mortgage, in other words, “upside down” on the loan. In that case, it's the lender that takes on any financial burden and the borrower's heirs can simply walk away from the property without owing anything.
Again, signing up for a reverse mortgage may make sense, depending on the circumstances. However, it's a complex financial instrument and it's important that the borrower understand the terms of the mortgage. Otherwise, there is significant potential for unforeseen consequences down the road.
If you are considering a reverse mortgage or if you would simply like to talk to a qualified estate planning attorney about how to protect your family in general, contact Nexus Legal Solutions at 407-900-7722 for a consultation.
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